Is Long-Term Care Insurance Worth the Investment?

For many people in their 50s and 60s, the decision of whether to purchase long-term care insurance is a pressing concern. Yet, despite this, only a small fraction—around 2.3%—of individuals in this age group choose to buy such policies. The long-term care insurance industry has shrunk significantly since the early 2000s, with the number of participating insurers dropping from over 100 to fewer than 12 today. This decline is mainly due to the unpredictability of future claims, low returns on premiums, and rising costs associated with coverage.

While the remaining plans vary in terms of pricing and benefits, the central challenge remains the same: consumers must balance the cost of premiums today with the uncertain expenses they may face in the future for long-term care. However, estimating these future costs can be incredibly difficult.

What Does Long-Term Care Insurance Cover?

Long-term care insurance is designed to help cover the costs associated with chronic conditions or disabilities that affect daily living. This may include care in a nursing home, assisted living facility, hospice care, home care, or adult day care. According to the U.S. Department of Health and Human Services, the average man will require 2.2 years of long-term care, while women may need up to 3.7 years. However, care needs can vary over time, with some individuals needing a combination of home care and facility-based care depending on their health status.

For those without insurance, paying for long-term care often means dipping into personal savings, though Medicaid can step in once an individual has spent down their assets to a very low level—typically $2,000. It’s important to remember that long-term care policies require ongoing premium payments to remain active.

The care provided by these insurance plans is generally custodial in nature, meaning it assists with everyday activities such as dressing, bathing, and feeding, rather than covering medical procedures or hospitalization. Medicare, on the other hand, generally covers skilled nursing care for up to 100 days per illness or injury.

What Are the Costs of Long-Term Care Insurance?

Long-term care insurance premiums are determined by several factors, most notably morbidity (the likelihood of becoming ill) rather than mortality (the likelihood of dying). Key factors that influence your premium include:

• Age: The older you are when purchasing the policy, the higher your premium is likely to be.
• Health: Pre-existing conditions or poor health may lead to higher premiums or even a denial of coverage.
• Gender: Women typically pay higher premiums due to their longer life expectancy.
• Marital Status: Married couples may receive discounted rates.
• Coverage: The amount of coverage and the length of the benefit period you choose will affect the cost.

In some cases, long-term care insurance may come with tax advantages. However, it’s also important to be aware that premiums could rise over time, especially if state regulators approve rate hikes.

Most policies include an “elimination period” or waiting period of 30 to 90 days before benefits begin. There is also typically a cap on how much the policy will pay out over its lifetime. These limits can quickly become a concern, especially considering the steep costs associated with long-term care. For example, according to Genworth’s 2020 Cost of Care Survey, the average cost of a private room in a nursing home was around $105,852 annually, while a one-bedroom apartment in an assisted living facility averaged $51,600 per year.

Who Should Consider Long-Term Care Insurance?

There are several factors to consider when deciding if long-term care insurance is right for you. For some individuals, the decision is driven by aggressive marketing tactics or a lack of understanding about their own financial situation. If you have substantial savings or assets, you may be in a position to self-insure. In this case, you could potentially sell property or use your savings to cover long-term care expenses if the need arises.

Additionally, many families provide care for their loved ones, with spouses or children often becoming the primary caregivers. In the event that savings run out, approximately 20% of seniors turn to Medicaid for long-term care assistance. For married couples, Medicaid allows one spouse to retain some assets while the other receives care.

On the other hand, some people choose to purchase long-term care insurance for reasons such as:

• Preserving their estate for heirs, ensuring that their wealth is passed down without being depleted by long-term care expenses.
• Lacking the financial resources to self-insure, and seeking the security of a policy to help cover the potential costs of care.

Key Questions to Ask Before Purchasing Long-Term Care Insurance

Before committing to a long-term care insurance policy, it’s crucial to evaluate your individual situation. Consider the following questions:

• Do you have pre-existing health conditions that may affect your eligibility or the cost of the policy?
• Are you over 75? Many insurers either reject applicants in this age group or offer policies with prohibitively high premiums.
• What are your future care needs likely to be? Assess your family’s health history, especially for conditions like dementia and Alzheimer’s, which may increase your need for care in later years.
• Do you have enough assets to self-insure, or is long-term care insurance essential for your financial planning?

Consulting with a financial advisor can help you understand whether long-term care insurance is a prudent choice for you and, if so, which plan offers the best balance of cost and coverage.

Conclusion

Long-term care insurance is not a one-size-fits-all solution. While it can provide valuable peace of mind for some, it’s important to thoroughly assess your financial situation, health history, and future care needs before making a decision. For those who can afford to self-insure or rely on family support, purchasing a policy may not be necessary. However, for others, it can be an essential tool for preserving their assets and ensuring that they are not burdened by the high costs of long-term care.